Q3 comment | TCS: Earnings grow with better execution of deals

In a seasonally weak quarter, Tata Consultancy Services managed to post a 1.1 per cent quarter-on-quarter (QoQ) rise in its consolidated net profit at ₹8,118 crore for the period ended December 31, 2019. This was helped by a rise in earnings before interest and tax (EBIT) margins to 25 per cent from 24 per cent a quarter ago. The rise in EBIT margins was helped by currency movement and ramp-up of deal executions.

In the previous two quarters, the EBIT margins had fallen from 25 to 24 per cent levels as the company had invested in training its existing employees in newer technologies, and hiked salaries. It has now returned to its industry-leading EBIT margin levels.

The company’s revenues grew 2.2 per cent QoQ to ₹39,854 crore, helped by decent growth in revenues from the UK and Continental Europe. However, the US market is still seeing some sluggishness. Asia-Pacific, India, West Asia and Africa saw tepid revenue growth during the quarter. TCS has stopped disclosing digital revenues from the quarter ended December 31, as it is getting increasingly difficult to segregate revenues due to the complexity of deal structures.

Deals and clients

The total deals bagged during the quarter stood at $6 billion, taking the value of deals bagged by TCS during the nine months ended December 31 to $18 billion. The company added two clients in the $100-million bucket, three clients in the $50-million bucket and 21 clients in the $20-million bucket, among others.

Its headcount fell sequentially to 4,46,675 employees from 4,50,738 employees. This is reflected in an uptick in its attrition rate to 12.2 per cent from 11.6 per cent a quarter ago.

BFSI vertical

There are still some challenges in the TCS’s mainstay vertical — banking, financial services and insurance — which is reflected in dollar revenues shrinking 0.7 per cent sequentially in the December quarters. The company said it is still facing challenges in the US and the UK.

However, payments is a big focus area for the future in countries like Canada, the UK and the US. There are also many opportunities in the wealth management industry that the company is looking at. These areas could drive future growth in BFSI.

Other verticals

Among the other verticals, manufacturing ($559 million revenue) shrugged off the slow Q2 and posted dollar revenue growth of 3.3 per cent QoQ. The retail and CPG (consumer packaged goods) vertical posted healthy sequential revenue growth of 4 per cent in dollar terms, reversing the sequential contraction seen in Q2. The company is seeing many traditional retailers trying to transform their businesses. However, the retail and CPG vertical will remain volatile as these retailers continue to figure out their strategy to become more competitive.

The life sciences and healthcare vertical posted dollar revenue growth of 3.8 per cent, and the company plans to “double down on investment” in this vertical.